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Regis Q3 Loss Widens, Revs Beat

Regis Corporation (RGS) posted fiscal third-quarter 2014 adjusted loss of 15 cents, which compared unfavorably with the Zacks Consensus Estimate of a loss of 6 cents and the year-ago earnings of 1 cent. Cost savings initiatives, reduced bonuses, improved cost of product, and lower marketing costs could not offset the impact of weak same-store sales and increase in depreciation expenses. Share price of this hairstyling and hair-care salon company declined 0.23% following the release.

Total revenue decreased 6.6% year over year to $471.6 million owing to weak same store sales. However, it beat the consensus mark of $466.0 million by 1.2%.

Quarter Performance

Service revenues dropped 6.4% year over year to $367.2 million, mainly due to a decrease in North American salon revenues and a 4.9% decline in service same-store sales (due to a 5.7% fall in traffic). The decline in net store count also played a role in pulling down service revenues during the quarter. However, increase in average ticket price and one extra day during the quarter partially offset the negatives.

Product revenues declined 8.6% year over year to $94.3 million owing to an 8.9% fall in product same-store sales. However, royalties and fee revenues climbed 4.8% year over year to $10.0 million.

Rise in average ticket price of 1.0% could not make up for the 6.7% decline in guest count. Therefore, consolidated comps in the quarter were down 5.7%, worse than the year-ago decline of 1.4% and last quarter decline of 5.4%.

Cost of service, as a percent of service revenues, expanded 180 basis points (bps) to 61.6%. Negative leverage of stylist hours due to same-store service sales declines were partly offset by cost reductions derived from field reorganization, reduced bonus expense, lower healthcare costs and shift in Easter into fiscal fourth quarter of the year.

Cost of product, as a percent of product revenues, improved 270 bps to 48.9% attributable to a shift to higher margin products, promotional changes, lapping of clearance sales, and reduced sales commissions.

Our Take

Regis posted a wider-than-expected loss in fiscal third quarter 2014. The company’s bottom line has been reeling under pressure for quite some time now due to lower revenues, higher labor costs and mounting retail expenses. Owing to the continuous fall in customer count, the company has been witnessing declining comps for the past 23 quarters. Although the company has undertaken several sales-building initiatives, we believe that the sluggish comps trend will continue to affect its performance until customer-visit patterns completely rebound.

Regis holds a Zacks Rank #5 (Strong Sell). Other retail stocks such as, Office Depot, Inc. (ODP), CST Brands, Inc. (CST) and Staples, Inc. (SPLS) are slated to report quarterly earnings soon. Office Depot is set to report on May 6, CST Brands will report on May 13 and Staples, Inc will report on May 20, 2014.